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 Soybeans and Corn OptionsAugust 20, 2010
Get the free booklet "Lessons Learned" from International Futures Group Get your complimentary booklet "Lessons Learned" from industry veteran and co-founder of International Futures Group, Lee Gaus. By George Kopp, International Futures Group Last week my colleague Kevin Davitt authored an article relating to options and option volatility. I want to follow up on Kevin’s article showing how several of our recommended soybean option strategies may have aided in reducing producer risk. Below I’m going to list two examples in the soybeans and one in the corn market. Since the June 10th USDA crop and production report the grains have made a nice move to the upside. In that time soy beans have moved $1.61 ¾, corn has moved 95 ½ cents from the June 29th low, and wheat had moved up $395 ¼ since June 10. For the month of July wheat was up $1.81 ¼ and the first four trading days of August it was also up another $1.83!! On June 10th of this year the USDA released the June 1 crop production report. I suggested to my clients they consider buying August soybeans around the $9.15 level. Due to the uncertainty of the weather in different parts of the growing area I also suggested that they consider selling August soybean 930 calls at 25 cents. For those of you not familiar with options this strategy is known as a covered call. The producer was protected to $8.90 on the downside. Some quick math for those that may not understand the downside risk $9.15 futures price less the amount collected from the calls .25 cents comes to $8.90 ($9.15 - .30 = $8.90). This strategy had a cautiously bullish bias. If the plan works the producer would collect .40 cents or $2,000. On August expiration, which took to place on July 23rd, the August soy beans settled at $10.17. The futures contract made $1.02 ($10.17 – $9.15 = $1.02). The option closed at .87 cents ($10.17 – $9.30 strike price = .87), we had sold the call at .25 cents (.87 – .25 = 62) we lost .62 cents, but made $1.02 on in the futures, hence 40 cents. Two weeks prior to August expiration we examined the September soybeans. On July 9th it was suggested that clients consider buying the September soybeans at $9.58 and selling the September $9.70 calls at .30 ¾. I won’t bother you with the math again but again clients are looking to collect .42 ¾ cents or $2,137.50. It is important to note that while we work hard to identify logical opportunities not all of your strategies are successful, We were fortunate to get in near the bottom of the soybeans. In the corn market we were a bit late to the parade so to speak but we waited for the right time to enter that market with a similar trade. September corn at the end of June was trading around the $3.35 level. It reversed and went to $404.25 on August 2nd. On August 3rd I suggested to clients they consider buying the September corn futures at $3.87 ½ and sell the September $3.90 calls at .12 cents. Expiration was going to occur in twenty-four (24) days on August 27th. A quick look on how this spread would do if September corn were to close above $3.90 on expiration. Twelve (12) cents is the equivalent of $600. In buying the corn two and a half cents below the strike price at 3.87 ½ the buyer collects $125 should the future close above 390 at expiration. Should September corn close above $3.90 at expiration one would collect $725 in 24 days. Again for piece of mind and to fully hedge your covered call on Monday August 16th I suggested to clients that wanted to be hedged to consider buying the September 390 puts at 2 cents or $100. By purchasing a put the cost of collecting the premium is reduced by $100. Instead of collecting $725 the client collects $625. So some of you are saying that’s all well and good, but how did you come to the conclusion to go long soybeans? First let me give you my technical take. Soybeans made their high for the year in the first week of 2010, and by the end of the first week of February made its low for the year. Looking back the range for the year was established in the first five weeks of the year. Subsequently soy beans have traded in a range since that time. The last two weeks of April an attempt at the $10.00 was made only to be rejected. For the next eight weeks soy beans traded in 50 cent range. In my opinion market action was suggesting that soybeans were going to make a move, but which way? The attempts to probe the low were made June 8th and 9th, the days just prior to the Crop production report on the 10th. We are now entering the ninth week of this trend. It is my opinion caution should now enter into our equation. There are two ways to approach this. The first would be to exit the position with nine days until expiration. The second would be to buy cheap insurance by buying the September $9.70 puts for about 2 cents. This insures that if there is a pullback in the September soy beans the put will offer down side protection. Again, as in the September corn example when buying the September soy bean $9.70 at 2 cents or $100 the amount collected is reduced. At International Futures Group we produce a daily newsletter in the geared towards the grain markets. I do a weekly webinar on Fridays reviewing the markets. If you would like to receive a copy of our newsletter or listen to a webinar please feel free to contact me at george@ifgfutures.com or call me at 800-786-4475. Seasonal Risk Disclosure--Seasonal demand & News are always factored into all Commodity markets price at any given time. There are no advantages being implied in the news & information contained in our material. Material Statements of Opinion --All statements of opinion are based on information that is believed to be accurate but is not gauranteed. There are no advantages being implied in the news & information contained in our material. Past performance is not indicative of future results. The information contained in this report is intended for informational purposes only and is the opinion of the writer and may change at any time. This information was compiled from sources believed to be reliable but accuracy cannot be and is not guaranteed. There is no warranty, expressed or implied, in regards to this information for any particular purpose. There is SIGNIFICANT RISK involved in trading futures and or options on futures and may not be suitable for all investors. Investors should consider these RISKS and evaluate their suitability based on their financial conditions. No one should ever consider trading futures or options on futures with anything other than RISK CAPITAL. This information is provided freely and is NOT in the capacity of a trading advisor. NO LIABILITY on the part of the author exists for any trading loss you may incur in the use of this information. Information provided is not to be construed as an offer to sell or solicitation to buy any commodity or security named herein. Get the free booklet "Lessons Learned" from International Futures Group Get your complimentary booklet "Lessons Learned" from industry veteran and co-founder of International Futures Group, Lee Gaus. About the Author George graduated from Michigan State University in 1975 with a B.A. in Business Administration. He started on the Chicago Board Options Exchange (CBOE) in 1980. Becoming a member in 1982 for Hull Trading Company a large proprietary firm. He was also a full member of the Chicago Board of Trade. George left the trading floor in 1993 and became a broker. He was a partner in Worldwide Associates from 2000-2007. He likes to apply the knowledge he gained on the trading floor specializing in spreads with futures and options. |
